Usury – Riba

Usury

From Wikipedia, the free encyclopedia

Usury (/‘juʒ(ə)ɹi/, from the Medieval Latinusuria, “interest” or “excessive interest”, from Latinusura “interest”) was defined originally as charging a fee for the use of money. This usually meant interest on loans, although charging a fee for changing money (as at a bureau de change) is included in the original meaning. After moderate-interest loans became an accepted part of the business world in the early modern age, the word has come to refer to the charging of unreasonable or relatively high rates of interest.

Historical meaning

The historical rendition of usury as a vile enterprise stems not only from a spiritual view that charging exorbitant interest is a flagrant manifestation of unchecked greed, but carries with it social connotations of perceived “unjust” or “discriminatory” moneylending practices.[citation needed]

Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury. These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself. Hence if you lent ‘food money’, or monetary tokens of any kind, it was legitimate to charge interest.[1] Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. … Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state. But the Jews took a different view of the matter.[2]

The Torah and later sections of the Hebrew Bible criticize interest-taking, but interpretations of the Biblical prohibition vary. One common understanding is that Jews are forbidden to charge interest upon loans made to other Jews, but allowed to charge interest on transactions with non-Jews, or Gentiles. However, the Hebrew Bible itself gives numerous examples where this provision was evaded.[3]

Johnson holds that the Hebrew Bible treats the lending as philanthropy in a poor community whose aim was collective survival, but which is not obliged to be charitable towards outsiders.

A great deal of Jewish legal scholarship in the Dark and the Middle Ages was devoted to making business dealings fair, honest and efficient. One of the great problems was usury, or rather lending money at interest. This was a problem the Jews had created for themselves, and for the two great religions which spring from Judaism. [4]

Interest of any kind is forbidden in Islam. As such, specialized codes of banking have developed to cater to investors wishing to obey Qur’anic law. (See Islamic banking)

Economic progress during the Middle Ages necessitated financial loans. As the Jews were ostracized from most professions by local rulers, the church and the guilds, they were pushed into marginal occupations considered socially inferior, such as tax and rent collecting and moneylending. This was said to show Jews were insolent, greedy usurers. Natural tensions between creditors and debtors were added to social, political, religious, and economic strains.

… financial oppression of Jews tended to occur in areas where they were most disliked, and if Jews reacted by concentrating on moneylending to gentiles, the unpopularity – and so, of course, the pressure – would increase. Thus the Jews became an element in a vicious circle. The Christians, on the basis of the Biblical rulings, condemned interest-taking absolutely, and from 1179 those who practised it were excommunicated. But the Christians also imposed the harshest financial burdens on the Jews. The Jews reacted by engaging in the one business where Christian laws actually discriminated in their favour, and so became identified with the hated trade of moneylending.[5]

Peasants who were forced to pay their taxes to Jews could personify them as the people taking their earnings while remaining loyal to the lords on whose behalf the Jews worked. Gentile debtors may have been quick to lay charges of usury against Jewish moneylenders charging even nominal interest or fees. Thus, historically attacks on usury have often been linked to antisemitism.

In 1745, the Catholic teaching on usury was expressed by Pope Benedict XIV in his VIX Pervenit, which strictly forbids charging interest on loans, although he adds that “entirely just and legitimate reasons arise to demand something over and above the amount due on the contract” through separate, parallel contracts.

Usury within religious texts

Hebrew Bible

If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest. (Exodus, 22:24[6])

And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)

Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:19-20)

Now there cried a certain woman of the wives of the sons of the prophets unto Elisha, saying: ‘Thy servant my husband is dead; and thou knowest that thy servant did fear the LORD; and the creditor is come to take unto him my two children to be bondmen.’ (Kings 4:1)

Woe is me, my mother, that thou hast borne me a man of strife and a man of contention to the whole earth! I have not lent, neither have men lent to me; yet every one of them doth curse me. (Jeremiah 15:10)

he that hath not given forth upon interest, neither hath taken any increase, that hath withdrawn his hand from iniquity, hath executed true justice between man and man, hath walked in My statutes, and hath kept Mine ordinances, to deal truly; he is just, he shall surely live, saith the Lord GOD. … [And he that] hath given forth upon interest, and hath taken increase; shall he then live? he shall not live–he hath done all these abominations; he shall surely be put to death, his blood shall be upon him. … [And he] that hath withdrawn his hand from the poor, that hath not received interest nor increase, hath executed Mine ordinances, hath walked in My statutes; he shall not die for the iniquity of his father, he shall surely live. (Ezekiel 18:8-9, 13, 17)

In thee have they taken gifts to shed blood; thou hast taken interest and increase, and thou hast greedily gained of thy neighbours by oppression, and hast forgotten Me, saith the Lord GOD. (Ezekiel 22:12)

Then I consulted with myself, and contended with the nobles and the rulers, and said unto them: ‘Ye lend upon pledge, every one to his brother.’ And I held a great assembly against them. … And I likewise, my brethren and my servants, have lent them money and corn. I pray you, let us leave off this exaction. (Nehemiah 5:7, 10)

He that putteth not out his money on interest, nor taketh a bribe against the innocent. He that doeth these things shall never be moved. (Psalm 15:5)

The rich ruleth over the poor, and the borrower is servant to the lender. (Proverbs 22:7)

He that augmenteth his substance by interest and increase, gathereth it for him that is gracious to the poor. (Proverbs 28:8)

New Testament

In the Parable of the Talents, Jesus seems to be promoting usury, but the passage can be interpreted to be calling a servant who did not work to be as wicked as a bank:

“But the master replied, ‘You wicked and lazy servant! You think I’m a hard man, do you, harvesting crops I didn’t plant and gathering crops I didn’t cultivate? Well, you should at least have put my money into the bank so I could have some interest.'”(Matthew 25:27, New Living Translation)

What this was understood to mean until modern days was that as the slothful servant falsely accused his master, who rather than harvesting where he didn’t plant, was actually generous and trusting. But if the lazy servant thought his master was so bad, why didn’t he make of him an usurer also, rather than do nothing with the investment that had been left to his care?

Love your enemies! Do good to them! Lend to them! And don’t be concerned that they might not repay. Then your reward from heaven will be very great, and you will truly be acting as children of the Most High, for he is kind to the unthankful and to those who are wicked. (Luke 6:35, New Living Translation)

“If you have money, don’t lend it at interest. Rather, give [it] to someone from whom you won’t get it back.” (Saying 95)

Here, Jesus is made to go farther than He actually did: He asks us to lend and hope not for gain or increase. We are entitled to receive what is ours back again, but even then, not to cause the debtor to be thrown into destitution.

Qur’an

Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)

God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)

O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-‘Imran 3:130)

And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)

The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if people give to charity, seeking God’s pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)

Usury in scholastic theology

St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to “double charging”, charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice as if one were to charge for a piece of cake and then make a further charge for eating it. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell.

This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that “to live by usury is exceedingly unnatural”. Islam likewise condemns usury. Judaism condemns it save when practised against non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the 5th Lateran Council (Session 10, 4 May 1515) expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as “Mons Pietatis”.

Later, the Protestant John Calvin (father of a Protestant Reformation movement known as Calvinism) defended interest charges. A connection was advanced in influential works by Richard H. Tawney and by Max Weber that this set the stage for the development of capitalism. In fact, technology and joint-stock companies were at least as influential and trade and commerce were not retarded in countries that maintained laws against usury. However, the growth in derivative financial “products” was certainly increased by the allowance of interest charges.

In the 16th century it was necessary for Shylock to convert to Christianity and forsake usury before he could be redeemed in the climax of The Merchant of Venice. Thomas Lodge‘s didactic tirade against London moneylenders, An Alarum against Usurers containing tried experiences against worldly abuses tried to incite the educated class against the harm usurers seemed to induce in their victims.

By the 18th Century usury was more often treated as a metaphor than a crime in itself, so that Jeremy Bentham‘s Defense of Usury was not as shocking as it would have appeared two centuries earlier.

Usury and the law

“When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not.” (Blackstone’s Commentaries on the Laws of England, p. 1336).

In the United States, usury laws are state laws that specify the maximum legal interest rate at which loans can be made. Congress has opted not to regulate interest rates on purely private transactions, although it arguably has the power to do so under the interstate commerce clause of Article I of the Constitution.

Congress has opted to put a federal criminal limit on interest rates by the RICO definitions of “unlawful debt” which make it a federal felony to lend money at an interest rate more than two times the local state usury rate and then try to collect that “unlawful debt”- Source 18 USCA 1961 B(6)(B). See Racketeer Influenced and Corrupt Organizations Act

It is a federal offense to use violence or threats to collect usurious interest (or any other sort). Such activity is referred to as loan sharking, although that term is also applied to non-coercive usurious lending, or even to the practice of making consumer loans without a license in jurisdictions that require licenses.

Usury rates in the US

States have statutes which set out how much interest can be charged before it becomes unlawful (Usury).

If a lender charges above the lawful interest rate, a court will not allow him to sue you to recover the debt, because his interest rate was illegal anyway.

And in some states (as New York) such loans are voided, meaning made void from the beginning or ab initio. Ref NY Gen Oblig 5-501 et seq. and NY 1503.

Ethical arguments for and against usury

Freedom of Trade

The primary ethical argument in defense of usury has been the argument of liberty against the “restraint of trade” since the borrower has voluntarily entered into the usury contract. On the other hand, if borrowers are driven to such debts out of necessity, or economic duress, then entering into a usury contract may not be entirely voluntary. Further, to enter into a contract that enslaves oneself is the opposite of the nature of freedom. However, the ability to enter into contracts is the very nature of freedom.

Investment

A practical argument for usury in welfare economics is that charging interest is essential to guiding the investment process, based on the claim that profits are required to direct investments to their most productive use (solving the economic calculation problem). According to this argument, interest-driven investment is essential to economic growth, and therefore to the very existence of industrial civilization. This practical argument for the utility of usury treats all “unearned” returns to capital as interest; traditionally, guaranteed interest is usurious, whereas dividends from shared ventures are less so. In this tradition, the practical case against usury does not completely apply (although replacing debt market investments with stock market savings may not always be desirable). Officially, this is how capitalist Islamic states solve the calculation problem. An example of the ‘moral’ difference between dividend income and interest income is found in The Merchant of Venice: Shylock lends Antonio money for trade speculation, demanding repayment in flesh should Antonio’s project fail utterly (accepting none of the business risk).

Excessive rates

In addition to the defense of interest as such, the practice of charging high interest rates is defended by those who point out that such rates reflect the very fact that the loans are being given to creditors with a high risk of default (in a competitive debt market the interest spread simply covers the credit risk). Economists of the Austrian school say that there is no such thing as a “just” interest rate separate from the free market equilibrium determined by the time-preferences of individual lenders and debtors. (Other free market theorists take a similar view on the merit of an unregulated debt market, but may not explain the subjective estimate of a worthwhile interest-rate bargain through time preference.)

Adverse selection and enforcement methods

Some have defended the threat or use of force (legal or illegal) against non-payers (such as required by Shylock). This position is based on the idea that without force there will be a market failure – since very high interest loans will only be taken up by those intending to default. The need for enforcement stems from this adverse selection problem rather than any immorality inherent in moneylenders. See: “The market for lemons“.

Today’s credit reporting system in industrialized countries obviates much of the need for the use of force. Since all potential lenders can quickly learn of one’s delinquent status, non-payers may find an unwilling seller for many important goods, like apartment rentals, mortgages, renting of expensive equipment without a deposit, and in many cases, insurance or employment. In the minds of many debtors, such considerations outweigh fear of force brought against them. [citation needed]

Charities

Some low-interest charity loans (such as small business micro-loans) have made a defense on the fact that interest rates allow for the indefinite administration of the charity, the replacement of defaulted loans, and in some cases, the creation of additional loan pools in other regions. The final “ethical result” of the interest rates justifies charging them.

Islam

In contrast, the Medieval Schoolmen, Islamic scholars and others raise several arguments against usury. Islamic contract law prohibits trading on credit; commercial transactions must be made on the spot. Usury violates this principle, since usury essentially means buying money on credit.

Islamic scholars argue that usury also implies that the party in debt guarantees to pay the required amounts on refixed dates. Such guarantees, however, are impossible to make, as every business and venture runs the risk of failing.

As an alternative to usury, Islam strongly encourages charity and direct investment, where the debtor shares whatever profit or loss the business may incur.

Division of risk

Many view investing money and expecting it to be returned regardless of the success of the venture being financed by the loans still appears to be a scheme for making money simply by having money and not by taking any risk or by doing any work, adding any value or by any effort or sacrifice at all. [citation needed] However, in practice, such “risk-free” loans still carry the risk of default and contracts typically specify what to do in this possibility. Since the borrower bears more of the risk and thus receives the value of any returns above the interest rate, this acceptance of additional risk typically occurs when the borrower expects higher returns than the lender. [citation needed]

Inequality

Moreover, the growth in derivative financial products has certainly increased by the widespread and free allowance of interest charges but this has enabled wealthy financial institutions to create a debt imbalance in their favour at the expense of borrower countries (which includes the United States of America, that currently has a debt in the trillions of US Dollars). The provision of credit at rates that are much higher for the poor is, like other instances where the poor’s costs are higher, sometimes seen as a negative attribute of capitalism. [citation needed]

Moreover, if interest rates are higher than returns on productive investments, investment may be directed away from production loans into consumption loans.[citation needed] Moreover, productive investment time-frames can become unrealistically shortened and a business can be expected to produce returns in short order[citation needed] and, when it does not, the lenders simply foreclose and take over the business even though this action may be shortsighted. This may be a disincentive to investment, except perhaps, for those businesses which are so large that they have no need for external credit and can readily meet loans from collateral offered.